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Brokers Say CFTC’s International Rules Harm U.S. Firms

Executives at brokers criticize the agency’s interpretation of new rules for its global counterparts.

The main U.S. swaps regulator risks harming American firms with the way it’s telling international counterparts to interpret rules to oversee the $648 trillion swaps market, according to executives at brokers from ICAP Plc to Tradition North America Inc.

The Commodity Futures Trading Commission is weighing final guidance on the cross-border reach of trading, capital, collateral and other swaps rules under the Dodd-Frank Act. The commission held a meeting in Washington last week with the U.S. Securities and Exchange Commission, which shares oversight of some swaps markets, where European regulators said the U.S. approach wouldn’t work.

“It’s actually very evident that a lot of what the CFTC has done is harming the U.S.,” Mark Beeston, chief executive officer of portfolio risk services for ICAP, said yesterday on a panel discussion at the SefCon III conference in New York.

Group of 20 nations set an end-of-year goal to complete swaps regulations designed to reduce risk and increase transparency in a market faulted for helping to fuel the 2008 credit crisis. Lack of clarity and cross-border wrangling over the rules threaten to delay the deadline, according to the Financial Stability Board, an international regulatory group that has been monitoring new swaps rules.

“We are at quite a dangerous junction,” Julian Harding, executive director of Tradition North America, a brokerage unit of Paris-based Viel & Cie., said during the panel.

At the meeting in Washington last week, Patrick Pearson, head of the financial market infrastructure unit at the European Commission, warned of risks in the CFTC’s guidance for complying with its rules. “The proposed approaches across the globe simply won’t work. They won’t mesh. They won’t interact. They will cause conflicts,” Pearson said. “Washington, we have a problem.”

The CFTC has allowed for so-called substituted compliance for branches, subsidiaries and other overseas affiliates of U.S. banks when foreign jurisdictions have comparable swaps rules.

The CFTC’s proposal, released in June, failed to sufficiently clarify the reach of the rules and could lead to conflicts, according to letters submitted to the agency by overseas regulators. The letters were sent by the U.K.’s Financial Services Authority, European Commission, European Securities and Markets Authority, Financial Services Agency in Japan, the Bank of Japan, Bank of France and Swiss Financial Market Supervisory Authority.

‘Jingoistic Problems’

The idea of substituted compliance is bound to fail, Harding said.

“It looks rife with almost jingoistic problems right from the beginning,” he said. “I do not think substituted compliance can be something fashioned to get us out of cross-border problems.”

The SefCon conference is sponsored by the Wholesale Market Brokers’ Association, Americas, an industry group consisting of inter-dealer brokers that have lobbied the CFTC and others on how rules for so-called swap execution facilities should be written. The association’s members include ICAP, Tradition Financial Services Inc., GFI Group Inc., BGC Partners Inc. and Tullett Prebon Plc. Inter-dealer brokers match trades between banks.

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